Friday, February 28, 2014

With Ukraine being in the news on a
daily basis over the past few weeks, I wanted to post a summary of key points
about the nation's economy, particularly since very few of us have any deep
knowledge of the country.

Ukraine has a population of 45.59
million people (2012) and is considered a lower middle income nation by the
World Bank. The nation is composed of two main ethnic groups; Russians who
comprise around 17 percent of the population and Ukrainians who comprise 78
percent of the population. Life expectancy at birth is 71 years, up
slightly from 68 in 2004.

Economic growth has been a problem
for Ukraine, particularly since the Great Recession. Here is a graph
showing GDP in billions of current United States dollars:

Between 2004 and 2009, Ukraine's
economy grew by between 2 and 12 percent. When the Great Recession hit,
the economy shrank by 15 percent in 2009, rising 4 percent in 2010 and 5
percent in 2011. Unfortunately, 2012 saw growth of only 0.2 percent, a
scenario that continued in 2013 as shown on this graph:

The World Bank projects economic
growth of 2.0 percent in 2014, 1.0 percent in 2015 and 0.7 percent in 2016.

Ukraine's current account balance is
in very poor shape. Current account balance is defined as the difference
between what a country has in savings and what it invests. It is the sums
of the value of imported goods and services plus net returns on investments
held abroad minus the value of exports of goods and services. When a
current account balance is negative, it means that nation has more of its
economy financed by foreign nations and investors. Here is a graph
showing the trend in Ukraine's current account balance compared to its European and Central Asian peers:

Ukraine's current account balance as
a percentage of GDP fell from -2.2 percent in 2010 to -8.4 percent in 2012,
rising very slightly to -8.1 percent in 2013.

According to the CIA World Factbook, Ukraine has one of the
world's largest current account deficits when measured in dollar terms, coming
in 181st place in a 193 nation ranking with an estimated deficit of $11.92
billion in 2013. Which nation has the world's largest current account
deficit? The United States with a deficit of $360.7 billion in 2013
although, on the upside, it is a rather small percentage of GDP, coming it at
around -2.2 percent in the third quarter of
2013.

Now, let's look at Ukraine's debt.
Here is a graph showing what has happened to
Ukraine's government debt-to-GDP since 2000:

Fitch estimates that Ukraine's
debt-to-GDP could be around 48 percent by the end of 2014 due to the growing
government deficit, weak economic growth and the devaluation of the hyrvnia.
According to the Ukraine News Agency, data from the nation's central bank shows that Ukraine's total state
debt grew by 13 percent or $8.434 billion in 2013 to $73.078 billion with
growth of $4.247 billion in December 2013 alone. In 2014, Ukraine will
have to repay $8.2 billion on the foreign state debt which exceeds one-third of
the National Bank's reserves. Foreign reserves held by Ukraine's central
bank dropped by 16.9 percent or $4.1 billion in 2013 and an additional 12.8
percent in the month of January 2014 alone. As a result, Fitch has
lowered Ukrainian debt to a pre-default level of CCC.

Now, let's focus on the portion of
Ukraine's debt that is owed to the World Bank. Here is a graph showing
the size of the World Bank's International Bank for Reconstruction and
Development (IBRD) loans to Ukraine:

Of the total of nearly $5.807
billion in loans, $4.454 billion has been disbursed and $903 million has not
been disbursed. Over the past two decades, loans were made for a wide variety of projects including
housing, water projection, hydropower rehabilitation, urban infrastructure and
road improvements. A substantial number of the loans mature in 2014,
fortunately most of the loans have an interest rate that is well under 1
percent with many of them being interest-free as shown on this chart:

Ukraine's total current obligation
to the World Bank is $3.314 billion. Many of these loans are in U.S.
dollars which will make it more difficult for Ukraine to pay back since its
currency has plunged in value as shown here:

Ukraine is just in the initial phase of its economic crisis which has been brought to the forefront now that the nation is in geopolitical no-man's-land. Once again, it looks like the IMF
will force itself into the fray, bailing out yet another debtor nation in a
desperate attempt to stave off another world economic crisis just like they did for Greece.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.